Economists aren't very hopeful about 2012

The good news is that the U.S. economy in 2012 isn't likely to be much worse than this year's has been. The bad news is that it might not be much better. The most likely outcome for 2012, economists say, is another year of muddling along.

WASHINGTON — The good news is that the U.S. economy in 2012 isn't likely to be much worse than this year's has been. The bad news is that it might not be much better.

The most likely outcome for 2012, economists say, is another year of muddling along.

What's most troubling about that forecast is that many economists warn that if they're wrong, it's most likely to be because they were overly optimistic.

"Unfortunately, right now most of the risks are on the downside. There's the possibility of a meltdown in the eurozone that would drag the U.S. down into recession, and probably China and other parts of the world as well," said Nariman Behravesh, the chief economist for forecaster IHS Global Insight.

That's not what Behravesh expects: He puts the odds at one in five or one in four. But what happens in Europe will affect how the U.S. economy performs next year.

Europe finished the year with a flurry of high-level leaders' meetings, where bold promises were made to forge deeper ties and integrate the European Union budgeting process. But EU leaders didn't expressly give the European Central Bank more powers, and it's been reluctant to snap up government bonds as a large-scale lender of last resort, as the U.S. Federal Reserve did in 2009 and 2010.

That's one reason that Italy, Spain and other troubled nations still face high borrowing costs, making it harder for them to dig out of their problems. And austerity-budget measures across Europe are expected to sharply slow national economies there that already are on the brink of recession.

For those reasons, economists at Bank of America Merrill Lynch are more pessimistic than most. They put the chances of a much deeper European crisis at 40 percent.

"If it really does reach that kind of stage of distress, we will see a mild global recession. So quite a risky year ahead," Ethan Harris, the bank's co-head of economic research, said Dec. 15 during a conference call.

Even without a European meltdown, Harris sees the U.S. economy slowing sharply. He projects strong growth in the final three months of 2011, well above 3 percent, but sees that braking to just 1 percent annualized growth by the final three months of 2012.

Federal spending cuts already agreed to should shave 1.5 percentage points off the U.S. growth rate next year, Harris calculates.

"We see a second shock coming from policy uncertainty," he said, pointing to a crush of unresolved issues of considerable weight in Congress. These include the Bush-era tax cuts — scheduled to expire at the end of 2012 — and the federal government poised to hit the debt ceiling again in early 2013, as well as pressure to make structural changes to big government programs such as Social Security and Medicare.

None of those is likely to be resolved before next November's elections.

"By current law, the government has left the lame-duck session of Congress to deal with one of the most difficult fiscal decisions in U.S. history," said Harris, referring to the post-election session expected next November and December.

Another drag on a speedy recovery is the housing sector, which many economists think will underwhelm again in 2012. Mark Vitner, a senior economist with Wells Fargo Securities, said Dec. 16 in a conference call that there were roughly 2 million homes in foreclosure, 2 million homes with delinquent mortgage payments and 2 million bank-owned homes that weren't even on the market — dubbed shadow inventory. It all puts downward pressure on prices and makes gauging the true supply of homes difficult.

"Because of that unknown supply and pressure on home prices, a lot of potential sellers are not putting their homes on the market," he said. In addition, "builders are holding on to cash" and staying on the sidelines until a clearer housing recovery takes hold.

Still, it appears that this year will end on an up note after a sluggish first half, providing some momentum into 2012.

"We continue to anticipate that GDP will rise at a 3.7 percent annual rate in the fourth quarter, reflecting solid growth of final sales to domestic purchasers (of 2.7 percent) and growth contributions from net exports and inventory investment of about half a percentage point each," wrote economists with Macroeconomic Advisers, a leading forecaster in St. Louis.

That pace of growth is likely to slow considerably next year, they said Dec. 16 in a research note.

"There is considerable uncertainty about the outlook for GDP growth in 2012 related to fiscal policy and the ongoing sovereign debt crisis in the eurozone. Our forecast that GDP growth will slow to 2.0 percent in the first quarter (and 2.2 percent over all of next year) assumes there is no extension of the payroll tax holiday and that the situation in the eurozone will first worsen before a constructive resolution is implemented, leading to a temporary weakening of the financial conditions that underpin our GDP forecast," they said.

John Silvia, the chief economist at Wells Fargo Securities in Charlotte, N.C., also expects a slower pace next year. He forecasts 2 percent growth for the U.S. economy in 2012, with some growth in income and consumer spending. Those positives are offset by European woes weighing on the global economy, which in turn will weigh on the performance of U.S. exports, a bright spot in recent years.

The group's international economist, Jay Bryson, sees global growth at 3.6 percent or 3.7 percent, well below where it's been in recent years, when big emerging economies such as China, Turkey and Brazil have been driving up growth rates.

"We think next year will be a slow year. It's not a 2009, unless Europe blows up. It's not a global recession, but it's not back to 2004 to 2007, when we were at about 5 percent," Bryson said.

China also poses a downside risk. It's expected to grow in the range of 9 percent this year, slowing to around 7.5 percent next year. That's still a blistering pace for most countries, but China had been growing in double digits for the past decade and Europe is a principal destination for its exports.

A Chinese slowdown would hit U.S. companies operating there, such as General Motors, as well as U.S. exporters to China, from farmers to medical-equipment manufacturers.

A slowing China also hurts big developing countries that export raw materials, such as Brazil, and that will reduce U.S. exports to them as well.

"China is a locomotive for the commodity-exporting emerging markets," said Behravesh of IHS Global Insight, who added that China's housing bubble is deflating and could add to economic challenges there.